Seribu Pty Ltd v FC of T
Members:BJ McCabe DP
Tribunal:
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
[2020] AATA 1840
BJ McCabe (Deputy President)
1. The Rum Rebellion occurred in 1808. It was a defining event in colonial history. Governor William Bligh, a naval officer, was deposed and arrested after coming into conflict with the officers of the New South Wales Corps and prominent local citizens. The moment of the rebellion was captured (almost certainly fancifully) in a famous painting depicting Governor Bligh being dragged from under his bed. The rebellion ended in 1810 when Lachlan Macquarie, the new governor, landed in Sydney with his own regiment. The remaining leaders of the rebellion were arrested, and the New South Wales Corps was recalled. But the new administration also had to deal with the conditions which made the coup possible.
2. Those conditions were pitiable. Most of the population survived on rations provided through the government stores. There was little enough to buy, and - importantly - nothing to buy it with. The pound sterling was the official currency, but coins introduced into the colony by recent arrivals and visiting ships quickly dissipated. The naval administration had not issued a local currency. There was no money supply or system of banking. Commerce, such as it was, proceeded using a barter system in which things of value were traded.
3. Tradeable things of value included written IOUs. It was common for individuals with an entitlement to goods from the government stores to sign a document transferring or negotiating that right to another. There was an obvious problem with a system of IOUs in a penal colony. Many of the convicts had been convicted of forgery. A good deal of the paper in circulation was fake.
4. Rum was a particularly valuable commodity in this context. Rum was readily traded in return for goods and services. There was demand for rum in its own right, but it also served as a form of currency. A coterie of officers in the New South Wales Corps had
ATC 8849
taken control of the rum trade. In their hands, the monopoly over the trade became (almost literally, since rum was currency) a licence to print money. That put the officers on a collision course with Bligh who had attempted to ban the trade. The Rum Rebellion was at least partly a product of the officers' irritation with the governor's attempts to interfere with their control over the rum trade - and over the currency.5. Macquarie's reforms broke the officers' control over the rum trade. He assigned licences to import and deal in rum to selected merchants in return for their promise to build public works, including the so called 'Rum Hospital'. (That building still stands. It houses the legislative council of New South Wales.) But Macquarie also undertook more fundamental economic reforms that relieved the political dysfunction. In 1813, the governor took steps to establish a money supply. He arranged for the import of a quantity of Spanish coins and put a convicted forger to work converting the coins into an official local currency which included the so called 'holey dollar'. Macquarie furthered his fiscal and monetary reforms by issuing a charter to establish the Bank of New South Wales in 1817.
6. The experience of the Rum Rebellion and its aftermath demonstrates the importance of a stable money supply under the supervision of government. That lesson has been repeated in countries around the world where currency collapse has been a feature (and often a precipitating cause) of political upheaval and social unrest. Control over monetary policy - including a measure of control over the currency and the money supply - is an important tool for governments to use in their management of the economy.
7. These days, control over the currency in Australia is exercised by the Commonwealth under the Currency Act 1965 and Part V of the Reserve Bank Act 1959. The Currency Act establishes the Australian dollar as this country's official currency, and dollar notes in various denominations are printed and issued by the Reserve Bank. But we live in a globalised world where an Australian might have dealings in a variety of currencies. Most of those currencies are issued by (or under the authority of) foreign governments.
8. New technology has created ubiquitous alternatives to sovereign-backed or -authorised currencies. These new forms of currency are called cryptocurrencies. The best known of them is Bitcoin. The emergence of these new forms of currency raises a variety of issues, including issues with respect to tax. We are dealing with the taxation issues in these proceedings.
9. Division 775 of the Income Tax Assessment Act 1997 (ITAA97) sets out the rules governing the treatment of foreign currency gains and losses for tax purposes. The applicant in these proceedings, Seribu Pty Ltd, dealt in Bitcoin. The company made a loss on those dealings. It says it should be entitled to deduct that loss under the rules in Div 775. The Commissioner of Taxation says Div 775 is limited to losses on foreign currency as defined in s 995-1. The Commissioner insists a cryptocurrency like Bitcoin is not a foreign currency for the purposes of Div 775.
10. Seribu thinks the Commissioner is wrong. To that end, it lodged a private ruling request under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (the Administration Act) on 22 October 2018. After posing the question in various ways, Seribu finally settled on a question that asked:
Is the taxpayer's bitcoin a 'foreign currency' for the purposes of s 995-1 of the Income Tax Assessment Act 1997?
11. The Commissioner answered 'No'. That position was maintained on objection, and Seribu has now come before the Tribunal for a review.
What is Bitcoin?
12. Bitcoin is not issued by a sovereign state. It has been described as "the world's first completely decentralized digital currency".[1]
ATC 8850
costs. Bitcoin solves this 'double spending' problem:…by distributing the necessary ledger among all the users of the system via a peer-to-peer network. Every transaction that occurs in the bitcoin economy is registered in a public, distributed ledger, which is called the block chain. New transactions are checked against the block chain to ensure that the same bitcoins haven't previously been spent, thus eliminating the double spending problem. The global peer-to-peer network, composed of thousands of users, takes the place of an intermediary…[2]
Ibid 4.
13. The Commissioner of Taxation has also considered the nature of Bitcoin in the course of his determination TD 2014/25 titled Income tax: is bitcoin a 'foreign currency' for the purposes of Division 775 of the Income Tax Assessment Act 1997? The determination said (at [8]) Bitcoin:
…[has been] described by commentators as 'a virtual currency that essentially operates as online cash' and as a 'crypto-currency, designed to reinvent the way that money works'. Bitcoin operates as a decentralized peer-to-peer payments network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoin and in doing so generates new bitcoin. The Bitcoin system is decentralized in that it is not under the control of a central authority. Transactions on the Bitcoin network are denominated in bitcoin. The value of bitcoin is 'not derived from gold or government fiat, but from the value that people assign it'. (Footnotes omitted)
14. The applicant referred me to several articles dealing with Bitcoin and its role in the digital economy. I was also referred, by both parties, to decisions from courts in different jurisdictions where the concept of cryptocurrencies has been discussed.[3]
Commissioner of Taxation v McMahon [1997] FCA 1087; (1997) 79 FCR 127 at 133 per Lockhart J. As his Honour explained in McMahon:
In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement…
15. It follows that additional evidence - about Bitcoin or much else - will not assist accept insofar as it provides some context for the facts identified in the private ruling. As it happens, I am satisfied the material I have referred to above is sufficient to provide context to the admittedly limited statement of facts set out in the private ruling.
The facts constituting the arrangement in the private ruling
16. The Commissioner's private ruling set out the relevant facts which comprise the scheme as follows:
- (a) The taxpayer has acquired 0.56 Bitcoin via instalment during the 2018 financial year valued at AU$5318.24.
- (b) The taxpayer settled a payment with 0.5 Bitcoin during the 2018 financial year with a market value of AU$3892.19.
- (c) The taxpayer retains 0.06 Bitcoin in a Cryptocurrency wallet.
17. When the taxpayer settled the payment with 0.5 Bitcoin, it was worth AU$856.24 less than 0.5 Bitcoin at the time of acquisition. It is this loss which the taxpayer wants to deduct from its assessable income.
ATC 8851
18. Section 775-5 explains that a taxpayer's assessable income includes a forex realisation gain that the taxpayer makes as a result of a forex realisation event. The basic rule to that effect is set out in s 775-15(1). If the taxpayer makes a forex realisation loss as a result of a forex realisation event, the amount of the loss may be deducted from the taxpayer's assessable income. The basic rule to that effect is set out in s 775-30(1). There are exceptions to and variations on the basic rule, but they are irrelevant for present purposes.
19. The objects of Div 775 are set out in s 775-10. These include:
(a) to recognise * foreign currency gains and losses for income tax purposes;
(b) to quantify those gains and losses by reference to the change in the Australian dollar value of rights and obligations
20. The expression foreign currency in s 775-10 is not used accidentally. The term appears throughout Division 775, and elsewhere in ITAA97. In particular, it is used in the provisions in s 775-5 that describe five different forex realisation events that can occur. Remember that forex realisation gains and forex realisation losses occur in connection with forex realisation events.
21. So what is a foreign currency - and does it include Bitcoin, which is not issued by a government or identified with any particular jurisdiction?
22. Section 995-1 defines the expression 'foreign currency' to mean "a currency other than an Australian currency". The section does not go on to define 'Australian currency' but it presumably refers to the official currency established under the Currency Act 1965. That approach is consistent with the observations of Brennan J in
Leask v The Commonwealth (1996) 187 CLR 579 where his Honour said (at 595):
Currency consists of notes or coins of denominations expressed as units of account of a country and is issued under the laws of that country for use as a medium of exchange of wealth… [emphasis added][4]
To similar effect, see . In that case, Starke J opined (at 21): “At common law the Crown enjoyed the exclusive right of making and issuing money: but that right has long been regulated by statute”. Goldsborough Mort & Company Ltd vHall (1949) 78 CLR 1
23. If that is so, the Commissioner says it is easy to see how the word 'currency' in the section should be read down. On this approach, the expression only includes currencies that are like Australian currency in the sense they are issued by or under the authority of another (non-Australian) government, or by some supra-national body like the European Union. 'Unofficial' currencies like cryptocurrencies would not be covered by the definition, and might not be currency on any analysis: Commissioner's submissions at [30].
24. Seribu disagreed with that approach. Mr Ahmed, the director of Seribu who appeared on its behalf at the hearing, said the expression 'currency' should not be confined to the money of a particular nation or (to the extent that is a different thing) the legal tender of a particular country. If that was the intent, he argued, Parliament would have made itself clear - as it did in s 3 of the Financial Transactions Reports Act 1988 which expressly defines 'foreign currency' as "the currency of a foreign country": applicant's submissions at [68]-[69]. Mr Ahmed argued the defining qualities of a currency include being "fungible, measurable and used as a medium of exchange for goods and services": applicant's submissions at [12]-[13]. Bitcoin answered that description, he said. He went on to refer to the explanatory memorandum which accompanied the legislation which introduced the term 'foreign currency' into ITAA97. He said the amendment was prompted by a policy concern about foreign currency gains and losses arising out of business transactions falling outside the income tax net.[5]
25. Mr Ahmed said the judgment of the High Court in
Watson v Lee [1979] HCA 53; (1979) 144 CLR 374 supported his broader interpretation. That case arose out of a challenge to the validity of regulations made under the Banking Act 1974. The regulations in question made it an offence to send Australian or foreign currency out of Australia in certain circumstances. While the challenge was mounted on several grounds, the relevant portion of the discussion relates to the constitutional issue - specifically, whether s 51(xii) of the Constitution confers legislative
ATC 8852
power with respect to foreign as well as Australian currency. The text of s 51(xii) refers to "Currency, coinage and legal tender". Stephen J said the word 'currency' (at [39]):… without more, is not necessarily to be confined in its meaning to the money of a particular nation nor to that which is one nation's legal tender; indeed it has sometimes been used in a quite opposite and special sense to distinguish sterling from the irregular local coins formerly circulating and competing with sterling in some British colonies, particularly in Australia, from which was derived the old description "Currency lads and lasses".
26. The reference to the historical context was important because, as his Honour explained (at [38]):
…in construing the Constitution it is proper to have regard "to the state of things existing when (the Constitution) was passed, and therefore to historical facts" - Attorney-General (Cth); Ex rel.
McKinlay v. The Commonwealth [1975] HCA 53; (1975) 135 CLR 1, at p 47, per Gibbs J.
27. His Honour went on to explore some of those historical facts, which included an established practice of using domestic legislation to regulate the import of foreign currency into the realm: at [38].
28. The reasoning in Watson suggests the Commonwealth Parliament has the power under s 51(xii) of the Constitution to regulate dealings in cryptocurrencies along with dealings in currencies issued by other sovereign states; cf
Leask v The Commonwealth (1996) 187 CLR 579 per Brennan J at 595. But that is not the question before me. I must decide whether the expression 'foreign currency'
as it appears in ITAA97
(and Div 775 in particular) includes Bitcoin. To answer that question, I must follow the established rules of statutory interpretation that are applicable to domestic legislation. Those rules require me to begin with the language of the section in the context of the Act as a whole. It would be a mistake to rush straight to the explanatory memorandum for guidance.
29. I have already pointed out the expression 'foreign currency' is defined in s 995-1 as "a currency other than an Australian currency". While the definition is expressed awkwardly, the meaning is clear enough: the reference to "an Australian currency" is plainly a reference to the unit of exchange established in the Currency Act, and the reference to "[an]other currency" must be interpreted in light of that comparator. It follows the "other currency" in question must be an official currency issued or recognised by a sovereign state.
30. Even if I accept the ordinary settled meaning of the word 'currency' now extends to cryptocurrencies, context makes all the difference. And 'context' provides an answer to Seribu's argument that losses and gains on dealings in Bitcoin might otherwise fall outside the income tax net. As the Commissioner pointed out in its submissions in reply, gains and losses from dealings in Bitcoin are still assessable (under s 6-5) or deductible (under s 8-1) (as the case may be) if the Bitcoin is held on revenue account. If it is held on capital account, the capital gains and losses incurred are dealt with under Part 3.1. The scheme of the legislation does not require the interpretation favoured by Seribu.
31. 'Context' also provides an answer to Seribu's argument with respect to the overseas authorities where Bitcoin has been discussed. While the opinions of foreign courts are of interest, they must be approached with caution when they arise out of a different factual matrix. In those circumstances, I am not satisfied either:
- (a) the decision of the United States District Court in United States v. Faiella 39 F. Supp. 3d 544 (SDNY, 2014) which dealt with money laundering; or
- (b) the decision of the European Court of Justice in Skatteverket v. David Hedqvist (Court of Justice of the European Union, C-264/14, 22 October 2015) which dealt with the treatment of financial supplies under the applicable VAT laws;
32. Seribu also referred to amendments to the GST legislation which include the expression "digital currency" in a number of provisions (eg, s 9.10 of the A New Tax System (Goods and Services Tax) Act 1999 which deals with the concept of supply). I do not think use of the expression digital currency in the GST
ATC 8853
legislation where it serves a particular purpose assists me in the interpretation of a different expression - foreign currency - used in the ITAA97.Conclusion
33. Mr Ahmed, the director of Seribu, plainly expects the emergence of cryptocurrencies like Bitcoin will have enormous implications. He argues there are good policy reasons for including gains and losses on dealings in Bitcoin within the rules set out in Div 775. But that is a question for law reform that will be answered by others on another day. For now, I must apply the law as it is, even if some might say it is imperfectly expressed. That law requires me to affirm the objection decision under review.
Footnotes
[1][2]
[3]
[4]
[5]
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.